Most business owners do not face the brutal reality of waste and inefficiency in their business operations. However, experts estimate that the average small business has at least 3% waste; some have much more! (Jay Arthur, “Lean Six Sigma Simplified”). This percentage may seem reasonable at first, but upon further examination, you will see what a profit killer it is.
As a customer, I’m sure you’ve experienced the frustration of things gone wrong. Products have defects. Deliveries arrive late. Parts to assemble are missing. Merchandise is labeled or priced improperly. Counts are inaccurate. Stores and restrooms are unclean. Salespeople lack knowledge. You get the idea. These typical problems occur often and cost business owners dearly in lost profit and lost customers. They are likely happening to YOU!
Waste is Preventable!
Most waste in your business is hard to spot—a little here and a little there, scattered throughout your office and operations. For example, I am always amazed by the number of undetected errors made on customer invoices. Mistakes, rework, delay, and lost time happen every day to everyone in every business. The average organization is like a steak, riddled with fatty waste.
For a company with a million dollars in sales, 3% waste amounts to $30,000 in cost. This expense, however, is not paid out of revenue dollars, but is paid out of profit dollars! If the company’s net profit before taxes is expected to be 8%, or $80,000 dollars, waste would reduce the profit to $50,000.
Do you realize what I just said? All waste in time and material comes directly off the bottom line. In this example, waste of 3% of sales translates to nearly 40% in lost profit. Yikes!
Stated another way, the company has to sell nearly $400,000 more to replace this $30,000 loss (sales equivalency) in order to achieve the desired profit level. (I don’t want to depress you, but it actually gets worse because there are additional costs in rework and handling of the waste.)
Reduce Your Business Waste to 1%
The closer you get to achieving perfect processes—and a perfect business—the more difficult and expensive it becomes. However, you can bring that 3% waste down to 1% fairly easily. It is not only doable but essential to compete and succeed in today’s business environment.
To error is human, but holy cow, we can all do better at cutting costs. It requires a little knowledge and the right tools. The Box Theory™ Way is designed to squeeze the waste out of your business systems and processes. There is no better way!
Your challenge for today (and you can’t go home until you do it) is to spot one area of waste or inefficiency in your business—an ounce of fat—that you can get rid of tomorrow. Then get after it first thing in the morning!
Related Articles:
Three Kinds of Business Waste Robbing Your Profit
Sales Equivalency—The Surprising Power of Cutting Costs
